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Family Dollar Is Swallowing its Own Poison Pill

While Family Dollar struggles, Dollar General and Dollar Tree will reap the long-term benefits.

The truth is that there probably isn't a soul in the universe that could save Family Dollar (NYSE: FDO) from its biggest obstacle: itself.

That was made glaringly clear the other day when Reuters reported that a "Poison Pill" had been developed after chatter that Carl Icahn, billionaire activist investor, would be pushing for a $6.89 billion merger with Dollar General (NYSE: DG). Icahn recently made news when he reported a 9.39% stake in the company.

The Monday after this rumor hit, we saw Family Dollar have a nice day on the market and ring in a 13% jump up to $68.62 per share. Similarly, Dollar General had a very good afternoon, jumping 7.35% to $62.25 per share.

What does this mean now for Family Dollar?Simply put, it means that Family Dollar is still an incredibly unstable company that is well behind the pace of its competitors. Let's not forget – according to its Q2 earnings release net sales were down 6.1% to $2.7 billion from $2.9 billion.

Meanwhile, Dollar General reported on June 3 a net sales increase of 6.8% to $4.52 billion from $4.23 billion.

What are they doing to improve the situation?Instead of focusing on the positive improvements of the company – and improving Family Dollar's position in the marketplace-management is now fighting with each other. That usually doesn't bode well for a company--especially for one like Family Dollar, which has notoriously struggled with operational success, and at the management level.

In April, Family Dollar's Chairman and CEO Howard Levine said, "Our second quarter results did not meet expectation," and that "We hold ourselves accountable for improving results."

The company planned out changes that the press release referred to as, "Immediate Strategic Actions." This included slowing new store openings in the following calendar years, reducing corporate overhead by "realigning key organizational functions to improve execution and reinforce the Company's commitment to being an efficient, low-cost retailer," closing 370 stores in 2014 that are simply underperforming, and strategically reducing prices on 1,000 basic items to bring even better value to the customer.

Then why are we here today?The continued failure of Family Dollar in store, the failure to execute these strategic actions, and continued challenges with Chairman and CEO Howard Levine surrounding his opposition to a merger with Dollar General really just reiterates the long-term uncertainty surrounding this company.

If you're new to the discount retailer game, though, you might think that these are the only two players – and maybe what we're seeing is a result of one just beating out the other.That couldn't be further from the truth.

Dollar Tree (NASDAQ: DLTR) saw a record setting 1st quarter with over a 7% increase in net sales, and a publicly reported increase in traffic. These days that's something any retailer would love to report.

Additionally, Dollar Tree reported that its average ticket rose as well, which means it drove its Key Performance Indicators (KPI's) higher. Key Performance Indicators are measuring sticks for success. When retailers evaluate their success, they utilize these KPI's to determine their performance against industry standards, as well as its competition.

Their net sales in the 1st quarter were a modest $2.0 billion, but long-term investors only care about growth.

Remember, its quality that's important – not quantity.

What is the final takeaway?It wasn't a safe bet before, so it isn't a safe bet now. Even when it would seem some interest could be sparked by a merger – it's becoming clear Family Dollar management will continue to act to its own detriment.

That leaves Dollar General to reap the long term benefits as they continue to lead the way in the Discount Retailer Market. As they lead the way, Dollar Tree will also continue to gain in the marketplace becoming another very safe bet when it comes to these Discount Retail Investments.